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Europe’s Decision on Greece Leaves Doubts

Finance chiefs give Greece more time to trim its deficit, but it's not clear how they'll fill new hole in the country's balance sheet.

Euro finance chiefs left unanswered how they’ll fill a fresh hole in Greece’s balance sheet without tapping their own bailout-weary taxpayers for money after giving the country two extra years to trim its budget deficit.

In the latest compromise in three years of crisis fighting, creditors led by Germany opted late yesterday to keep money flowing to Greece instead of risking a default that could lead to the nation’s exit from the euro and stir more turmoil for the countries that remain in the single-currency bloc.

Greece has made “far-reaching decisions that go in the right direction,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels today. He said Greece’s aid program can be re-engineered to plug a financing gap of as much as 32.6 billion euros ($41 billion) without costing creditors a cent.

Prospects of a funding deal at a hastily scheduled Nov. 20 meeting were clouded by objections from the International Monetary Fund, which took issue with the ministers’ decision to postpone the goal of getting Greece’s debt down to a “sustainable” level of 120 percent of gross domestic product by two years to 2022.

Market reaction was mixed. The euro and Greek bonds initially fell on concern that Greece’s financing dilemma would defy quick solutions. The market rebounded after Bild reported that Germany favors speeding planned future loan payouts. Spain’s bonds fell after Economy Minister Luis de Guindos said there was no discussion of a Spanish bailout last night.

Managing Director Christine Lagarde left open whether the IMF, provider of about a third of 148.6 billion euros in loans funnelled to Greece since 2010, will maintain its lending after the euro-area ministers consented to higher Greek debt for a longer period and ruled out a write-off of official debt.

“Debt sustainability of Greece has to be measured in 2020,” said Lagarde, who was French finance minister when the crisis started. “We clearly have different views. What matters at the end of the day is the sustainability of the Greek debt.”

The Europe-IMF rift was played down by Luxembourg Prime Minister Jean-Claude Juncker, who chaired last night’s meeting. In an interview in Hingene, Belgium today, Juncker said there is “no real dispute” and he’s “confident that the IMF will stay on board.”

Dominant Lender

The extra financing need was triggered by a decision to give Greece two more years, until 2016, to cut the deficit to 2 percent of GDP. Refusal by the IMF to pitch in would increase the cost for European governments, led by Germany, the dominant lender to Greece and three other countries -- Ireland, Portugal and Spain -- that have fallen back on international aid.

For now, Schaeuble said the terms of the Greek package can be rejiggered by cutting the rates on bailout loans or giving Greece extra time to pay them back, without requiring creditors to put up more loans or write off parts of Greece’s official debt.

“Our assumption is that the program is working so that in the end, it’s a matter of guarantees and not benefits for Greece,” Schaeuble said.

Write-offs are a legal and political taboo for German Chancellor Angela Merkel, running for re-election in late 2013 with the argument that her anti-crisis prescriptions are working and unwilling to call on the German parliament to authorize more money.

Greece’s loan rates have been cut and maturities extended twice before. Schaeuble characterized the resulting cost to creditors as a reduction in profit. He said other, as yet undisclosed, steps can be taken to make the Greek fiscal math add up. Bild newspaper reported that Germany favors speeding the delivery of previously approved payments to Greece, increasing the next installment to 44 billion euros from 31.5 billion euros.

The search for a solution will run in parallel with parliamentary debates in countries such as Germany, Finland and the Netherlands, three countries that have handed control over bailout policy to lawmakers concerned about throwing good money after bad.

Luxembourg’s Juncker predicted a “definite decision” next week on releasing the next aid payment. He said the ministers might have to consult once more, possibly by teleconference, by the end of November to formally sign off on the updated rescue package.

‘Done Deal’

The likely outcome is “a typical euro-zone fudge,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “Needless to say, the final decision on the next Greek tranche, a new financing gap and debt sustainability will not be the end of the matter.”

Economically and politically, the European commitment marked a triumph for Greek Prime Minister Antonis Samaras, who in power has whipped through the same budget-cutting policies that he was against while in opposition in order to keep Greece in the euro.

In a report presented to the ministers, praise for Greece’s savings measures and economic shakeup blended with concern that “vested interests” and “powerful pressure groups” will frustrate the reforms. Demonstrations and strikes have blunted past revamp efforts, and 15,000 people protested outside parliament in Athens two nights ago against the passage of an austerity budget for 2013.

“The key risks concern the overall policy implementation, given that the coalition supporting the government appears fragile and some components of the program face political resistance, despite the determination of the government,” said the report by the “troika” made up of the European Commission, European Central Bank and IMF.

In the meantime, Greece will escape a default on Nov. 16 when 5 billion euros in treasury bills come due. Greek banks will be able to roll over their bill holdings, saving the country from the “financing cliff,” European Union Economic and Monetary Commissioner Olli Rehn said. Greece sold 4 billion euros of bills today.

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